UK's growth forecasts slashed

Gloom over the British economy spread on Monday as the Confederation of British Industry slashed its growth forecasts and more evidence emerged of falling house prices.

The CBI said the economy was unlikely to grow by more than 2 per cent in 2008, a sharp deceleration from around 3 per cent this year. The business lobby had been forecasting growth of 2.2 per cent in September.

Property website Rightmove reported that annual house price inflation fell to its lowest in almost two years in the month to December 8. On an unadjusted month-on-month basis, asking prices for homes saw their biggest fall since the survey began nearly six years ago.

The biggest declines were registered in London and the south east, suggesting job cuts in the City may be starting to bite.

Rightmove said the decline had been accentuated by a large number of one- and two-bedroom properties coming onto the market. The slowdown chimes with weak reports from mortgage lenders and suggests housing wealth will not be the spur to consumer spending that it has been in recent years.

"The Rightmove survey adds to the rapidly mounting evidence that house prices are cooling markedly in the face of slowing activity, increased affordability pressures and tightening lending practices," said Howard Archer at Global Insight.

FALLING MORALE

Slower growth and falling consumer confidence comes at a bad time for Prime Minister Gordon Brown who has already seen a sharp drop in popularity.

A poll by Yougov for the Sunday Times newspaper showed Brown's Labour Party trailing the opposition Conservatives by the largest margin in more than 15 years.

The Bank of England joined with other central banks last week to launch a coordinated initiative to restore confidence to seized-up money markets, but the reaction of stock markets suggests it will not be enough to alleviate the gloom.

Britain's FTSE 100 index of leading shares has lost 3 per cent in the past week and many investors are worried that the persistent threat of inflation pressures will limit the Bank of England's ability to cut rates even if the economy does take a nose-dive.

"The economy is headed for an obvious slowdown and the risk of something more serious has certainly risen," said George Buckley, chief UK economist at Deutsche Bank.

Deutsche Bank reckons the economy will grow by just 1.8 per cent next year. This would match the rate seen in 2005 and be the joint-slowest pace of expansion since the end of the last recession in 1992.

The Bank of England cut interest rates to 5.5 per cent earlier this month and its latest quarterly forecasts suggest it has scope to deliver at least one more cut in the coming months. However, with money markets pricing in three rate cuts before the end of 2008, some may be disappointed.

There may be even less room for manoeuvre with fiscal policy. The government's finances are already stretched and projections are based on a speedy economic recovery in 2009, something most independent economists think is unlikely. (Reuters)